TORONTO – The credit crisis in Puerto Rico may give Congress an opportunity to pass legislation that would allow direct regulation of state and local issuers, municipal market participants said Saturday.
The participants made their comments as part of a larger discussion about continuing disclosure in the wake of the Securities and Exchange Commission's Municipalities Continuing Disclosure Cooperation initiative. The discussion was part of the Government Finance Officers Association debt committee meeting here before the group's annual conference.
Dealers and issuers have long been critical of MCDC, which began in 2014. The initiative promised underwriters and issuers lenient settlements if they self-reported instances where issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements. Altogether, 72 underwriters representing 96% of the underwriting market by volume have paid $18 million to settle violations with the SEC under the initiative. The SEC has already started reaching out to issuers about settlements and has said it intends to pursue actions against those who didn't report under the program after it finishes settling with those who did.
MCDC has led a number of municipal market groups, including GFOA, to hold meetings to discuss potential improvements to continuing disclosure. Dustin McDonald, then director of GFOA's federal liaison center, said in December that many GFOA members have been concerned that the MCDC initiative will be used to generate manyinstances of issuer violations of continuing disclosure agreements and obligations that can then be grouped together and presented to the SEC commissioners and Congress as the basis for direct regulation of issuers.
That concern may be closer to a reality, according to speculation from several people at the committee meeting, as SEC officials have reportedly been meeting with Senate Finance Committee chair Orrin Hatch, R-Utah, whose bill on Puerto Rico could serve as a vehicle for new regulations.
Currently, the Tower Amendment to the Securities and Exchange Act of 1934 prohibits the SEC and Municipal Securities Rulemaking Board from directly or indirectly requiring issuers to file municipal securities documents with them before the securities are sold.
Hatch released his bill, which is co-sponsored by Sens. Chuck Grassley, R-Iowa, and Lisa Murkowski, R-Alaska, on Dec. 9. It is primarily designed to address Puerto Rico's fiscal troubles, which currently include $70 billion in debt and $46 billion in unfunded pension liabilities, but one portion of the bill would also have implications for state and local governments.
That portion would require the plan sponsor of a state or local government employee pension benefit plan to file a report with the secretary of the Treasury Department for each year starting with the calendar year 2017. The report would have to provide information such as the plan's funding status, a schedule of contributions by the plan sponsor and each contributing employee, as well as alternative projections to be specified in regulations the Treasury secretary creates.
One participant in the meeting said tackling direct issuer regulation to bill language like that could be a logical next step and would fit past SEC trends.
"If you look at the history of the SEC, they regulate post-crisis," he said. "What is the crisis du jour? Puerto Rico. The reason [SEC officials] are talking to [the Finance] Committee is that the Puerto Rico bill would be a perfect place to address all the bad disclosure going on."
Congressional discussions about Puerto Rico have been stuck in the House for months. However, the House Natural Resources Committee, which has taken the lead on negotiating potential legislation designed to help the island commonwealth recently introduced a new version that seems more likely to win committee member approval.
The committee is scheduled to meet and hold a vote starting on Tuesday and continuing the next day. If the bill passes committee, it will then move to the full House and, if approved there, to the Senate after that. Most attention in Congress so far has focused on the House bill, but some observers say influential senators like Hatch may insist on substantial changes.
In addition to discussion about the potential for issuer regulation, the committee members and other invited participants picked up ongoing conversations from past meetings of the various market groups about disclosure. The group-generated ideas for disclosure have been seen as a way to show the SEC and Congress that the market participants can fix disclosure problems on their own.
One main proposal from those meetings that came up again Saturday was to have auditors ask issuers whether they are in compliance with their continuing disclosure agreements as part of a routine audit. Some issuers had initially opposed that idea, arguing the extra work for the auditors would raise fees for the issuers. However, supporters of the proposition like the Securities Industry and Financial Markets Association and the National Association of Bond Lawyers, have made clear the idea is to only give issuers an extra "poke" about disclosure.
"The position has never been to incur additional costs to have the auditors go check the filing," said Ken Artin, NABL's president. "It's about having someone simply ask 'did you file?' We want to put a little speed bump in the process where someone asks a question and the lightbulb goes off."
Issuers on the debt committee seemed to be in favor of the idea with one member saying implementation would be easy with a few tweaks.
Another member proposed that GFOA give out awards related to good disclosure and tier them for different sizes of issuers. She said such acknowledgements may be helpful in combatting the negative reputation issuers can get when the public finds out that they are settling with the SEC over past disclosure violations. She also said that recognition could help to stave off any increased regulation.
Artin also discussed what issuers who filed under MCDC could expect as the SEC continues to reach out with settlement offers.
The process for issuer settlements is relatively short, according to Artin. Issuers that filed will get a phone call from the SEC asking if they are still interested in participating in the initiative. If they agree, they will get a draft offer of settlement and have one week to check the facts. After that, issuers can request revisions to the factual presentation if they find mistakes. They then will have to deliver a signed copy of the settlement agreement within two weeks.
Artin, in response to several questions from committee members, said the SEC would likely be somewhat flexible with the timelines if the issuer makes clear early on that it likely will not be able to meet the short deadlines.
